RBNZ says financial risks have receded as house inflation slows

(Bloomberg) -- New Zealand’s central bank said risks to the nation’s financial system have receded after house-price inflation slowed and global dairy prices recovered from a slump.

“New Zealand’s financial system remains sound and the risks facing the system have reduced in the past six months,” Reserve Bank Governor Graeme Wheeler said in the bank’s semi-annual Financial Stability Report Wednesday in Wellington. Still, he warned that global uncertainty remains elevated and that New Zealand would be vulnerable if a sharp reversal in risk sentiment drove up borrowing costs for banks.

New Zealand home-owners have built up record amounts of debt in recent years as house prices soared, which may leave many stretched if borrowing costs were to rise quickly. Wheeler has cut his benchmark interest rate to a record low of 1.75 percent to spur weak general inflation, requiring him to introduce lending restrictions in an attempt to curb housing demand.

He said today that those restrictions have caused house-price growth to slow over the past eight months. However, “house prices remain elevated relative to incomes and rents, and any resurgence would be of concern,” Wheeler said.

A recovery in dairy prices over the past year had reduced risks faced by the dairy sector, though some parts of carry excessive debt and remain vulnerable, the RBNZ said.

New Zealand’s banking system “maintains strong capital and funding buffers, and profitability remains robust,” the central bank said. Still, banks had increased reliance on offshore funding for credit growth and remain exposed to a shift in global sentiment.

“A sharp reversal in risk sentiment could lead to higher funding costs for New Zealand banks and an increase in domestic borrowing costs,” the RBNZ said.